There's An Internal Correction Happening In The Stock Market

On Wednesday, I noted that the recent decline in the so-called “momentum” stocks--particularly in the S&P 500 Biotechnology, Internet Retailing, and Internet Software & Services industries--has raised fears that this might signal a market top. I noted that the S&P 500 remains near record territory despite the weakness in these stocks and that investors may simply be rotating into stocks with lower valuation multiples.

I noted that Financials seem to be benefiting from this internal correction. Wednesday afternoon, we learned that the Fed rejected the capital plans of five large banks and approved 25 as part of its annual stress tests. Companies must pass the test to receive approval to pay more dividends and to buy back shares. The results set the stage for several banks to do just that after years of restraint following the financial crisis. The S&P 500 Bank Composite Index is up 6.9% ytd, and should continue moving higher.

Also benefitting from the correction in the momentum stocks are the mature tech stocks that had been the high-flyers during the tech boom of the 1990s. The S&P 500 Systems Software stock price index (CA MSFT ORCL RHT SYMC) is up 3.6% ytd to a new bull market high and only 21.5% below its March 23, 2000 all-time high. Back then, the forward P/E of this industry was 49.4. Now it is 13.4. Back then, industry analysts predicted long-term annual earnings growth of over 25%. Now they are projecting 9%.